College Towns: An Investment Worth Holding?

So you’re looking for a new home, but you’re afraid that your shiny new house will depreciate in value in the current market?  Well, as long as you aren’t paying the tuition, college towns may be one of the safest places to buy.  The relatively constant housing and rental market, plus steady employment numbers, seems to insulate the local real estate market from short-term trends in the rest of the economy.  The consistency of housing demand is also likely due to the increasing importance of a college degree for getting a great job. (For instance, that dream job analyzing real estate markets for an exciting start-up … )

So how much better exactly are these homes?  In our sample of 35 college towns, only 6 performed worse than their home state.  That’s almost an 83% chance of higher-than-average performance.  In fact, homes in college towns performed 5.5% better than their home state. Let’s try to make that number a bit more tangible.

If you bought a $400,000 house in a college town last year, your completely average house would be worth $394,400 today.  Now let’s suppose you bought an “average” house anywhere in the U.S. for the same price one year ago.  Today’s value?  $367,600.  That amounts to a staggering difference of almost $27,000 in value in just one year.  That’s more than half the median household income in the U.S.!  So which cities did best and worst and why?  Let’s focus on some typical cities.  States are in red, cities in blue.

Most of the cities in this sub sample are fairly small. Many of these smaller, more isolated cities seemed to show more prominent gains than larger ones, which is likely because that city is a more homogeneously college-centric environment. Take Boston, where I went to school: It’s known for its dozens of colleges and universities, but it also has hundreds of thousands of citizens not at all associated with these institutions, including an extensive suburban network with which there is a lot of economic co-dependence. As a result, Boston is nearly identical to the state of Massachusetts. Note that State College, PA, the de facto definition of an isolated college town, has the largest difference (14%) between state and city of this sub sample.

Another important observation from the sample is that cities outperform their state regardless of how well the state has done. Most predominant, College Station, TX is still 3.5% higher than the state average in Texas. The data shows a strong trend for college real estate markets being able to weather the housing bubble bust better than most other markets. It will be interesting to see if the economy starts to have an effect on the ability for students to continue enrolling at the current volume. Obviously, a drop in the constant supply of students, professors, and staff would certainly be detrimental to these same markets that are currently outperforming the rest of the nation.